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Strategic foreclosure: Why people are ditching their mortgages

 More and more, indebted homeowners are deciding to walk away from their mortgages, instead of facing forced foreclosure. Who will pay the discarded debt?

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Chris O'Meara/AP/File
In this file photo, a foreclosed home is shown on Pine Island in Lee County, Fla. Underwater homeowners are opting out of their mortgages in increasing numbers.
  • By Douglas French Guest blogger

More and more underwater borrowers are deciding it’s time to walk from their mortgage. “Guilt and morality are one side, and objective financial analysis are on the other side,” 68-year old David Martin told msnbc. “They’re coming to two opposite conclusions. I wonder how many other people are struggling with the same question.”

Three out of 10 foreclosures in 2010 were of the strategic variety, an increase from 22% in 2009. The Mortgage Bankers Association believes strategic defaults are spreading like a virus. In a study entitled “Strategic Default in the Context of a Social Network: An Epidemiological Approach,” conducted by Michael J. Seiler of Old Dominion University, Andrew J. Collins of the Virginia Modeling, Analysis and Simulation Center and Nina H. Fefferman of Rutgers University and sponsored by MBA’s Research Institute for Housing America (RIHA) the authors found “One default does little to negatively impact the price of surrounding homes. However, as more and more mortgages in the neighborhood go into default, the negative impact is felt at an increasing rate. Much the same way as a disease spreads throughout a population, so, too, do decisions to ‘strategically’ default.”

Despite some experts projecting that the worst is over for housing, the immense shadow inventory of homes is casting a …well…shadow over the housing market. These estimates of the number of homes in foreclosure or likely to be in foreclosure are all over the map from Corelogic’s 1.6 million to 10.3 million estimated by Laurie Goodman of Amherst Securities.

Michael Olenick pegs the number at 9.8 million with the exposure being $1 trillion. He writes,

It is unclear where the money from these write-offs will come from, or whether they losses have been adequately budgeted. Obvious sources are Fannie Mae, Freddie Mac, European and US banks, none of which have reported anywhere near this level of reserves. We know that the Federal Reserve has been buying up MBS and related instruments in bulk; maybe the central bank plans to print more money to cover the losses and enable the foreclosures. Printing this much money, for this purpose, in this political environment, in secret, seems unlikely.

The Fed can keep printing, but it won’t keep homeowners from walking away.

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